The US non-farm payrolls report for May bears particular significance and is under heavy scrutiny given the rising concerns around a possible global economic slowdown. The report showed fewer job gains and slower wage growth, putting further market pressure on the Federal Reserve (Fed) to cut rates.

Non-farm payrolls increased by only 75,000 in May, after a downwardly revised 224,000 in April. Although the three-month trend of job creation is still solid at 151,000, the sizeable downside surprise is enough to cause nervousness - it indicates weakness even prior to the escalation in trade tensions with China and Mexico. Weakness in job creation was broad-based, but trade and economic sensitive sectors such as manufacturing and retail were notably affected.

One month of weak payrolls is not usually a big concern, as the data is volatile and often subject to revisions. In addition, the employment components from the ISM manufacturing and non-manufacturing indices have remained strong. However, the increased economic uncertainty over the escalation in trade tensions globally could lead to less hiring or even lay-offs in affected industries. We’ll be closely watching business and hiring surveys, but the balance of risk is clearly skewed to the downside.

Wage growth slowed to 3.1% in May from 3.2%, slightly below estimates. While the pace of wage gains is still near a cycle high, it suggests the tightening labour market failed to generate further upside pressure. We think that the consumption boost from tax refunds early in the year is going to fade, hence US consumption may get less support from here if wage growth continues to cool.

Overall, we think the US labour market is in good shape with the unemployment rate at a 49-year low of 3.6%. However, the downside surprise in both job and wage growth will undoubtedly add to more pressure for the Fed to cut rates. Markets are now pricing in almost three 25 basis points cuts in Fed funds rates by the end of the year, which we still think is too pessimistic. We have pencilled in a rate cut in June 2020 but the risk is of earlier action if a full-blown trade war materialises and the labour market deteriorates further.